The mayor of Venice and 35 other people have been arrested as part of a corruption investigation linked to the Moses flood barrier – Italy's daring plan to protect Venice from rising waters.

Mayor Giorgio Orsoni was placed under house arrest on Wednesday as 300 officers carried out raids to seize €40m (£32.5m) in assets, after a three-year investigation by magistrates, who allege contractors created a €25m slush fund for kickbacks to politicians overseeing the work.

Investigators also requested the arrest of Giancarlo Galan, the former governor of the Veneto region, who is accused of taking bribes and having a property refurbished for free by a contractor. Now a senator in Rome, Galan's arrest must be approved by the Italian parliament.

Investigators said they followed a complex cash trail between companies and politicians that passed through the tiny state of San Marino as well as overseas banks.

Launched in 2003 and due for completion in 2016, the €5.5bn Moses project will protect Venice from the ever more frequent high waters that leave St Mark's Square knee-deep in water and force tourists and residents to walk on raised wooden platforms.

Some 191 high-water incidents, measuring 110cm or more, hit Venice between 1966 and 2010, up from 21 between 1926 and 1965 thanks to stronger winds and extreme weather in the Mediterranean as it heats up due to climate change. Making matters worse, Venice has sunk by 23cm over the last century, supposedly due to groundwater extraction under the Venice lagoon.

The ambitious plan, which is 80% completed, sees 78 flood barriers set up at entry points into the lagoon. Normally sitting on the sea floor filled with water, the barriers can be pumped full of compressed air to raise them when high waters threaten.

A lawyer representing Orsoni said the allegations that he received illegal campaign financing from firms working on the project were "hardly credible", but a former Venice mayor, Massimo Cacciari, said there was little accountability on the project.

"I said it a million times but no one listened," he said.

The arrests are the latest in a series of inquiries into alleged kickbacks linked to public works in Italy, from the hosting of the G8 in 2009 to the world swimming championships in Rome the same year, to Milan's hosting of the Expo in 2015.

The Venice inquiry differs from other recent probes since politicians' election campaigns were also allegedly bankrolled, recalling the Tangentopoli scandal which wiped most of Italy's political class off the map in the early 1990s.

"Politicians have learned nothing," said prosecutor Carlo Nordio on Wednesday. "We have discovered a system which is very similar to Tangentopoli, involving characters who were involved back then, but much more complex and sophisticated."

Nordio said that battling corruption with new, ever more complicated, legislation was making things worse, not better.

"I have said it for years, and I repeat it today. One of the causes of corruption is the muddled and complicated state of our laws. To cut corruption you need fewer, simpler laws," he said.